USA Banking System

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					     Topic 3: Banking
Structures Around the

              The USA
Lecture Outline

 Important Features of the American Banking
 The decline of American Banks
    Regulation and other Factors
 Trends in American Banking
    Consolidation and Effects on International Banking
 American Banking Innovations
    Bank Holding Companies, ATMs, Non-Banks
 Unique US Financial Institutions
    Savings and Loans, Credit Unions
USA Banking System
Important Features:
 US banking system has over 27,000 deposit
   taking institutions compared to just under 600
   banks in the UK.
 Over the time the US banking sector has lost its
   dominance, particularly since 1974.
 The Bank of America remained in competition
   (rank 1 or 2 in the world) during 1968-83. In 1984,
   they were in 41st position.
 US banks weaknesses include developing
   country debt problems and decline in agriculture
   commodity and real estate prices.
 1981 was the year when large bank failure
   started - 10 individual failures in 1981 and 1000
   in 1989.
The Decline of the USA Banking
 Overall, the competitiveness of the banking
  sector has declined in the USA due to the
  fact that companies with abundant liquid
  funds could obtain rates higher than
  commercial banks were offering.
 The failure of several reforms (e.g. the
  Banking Reform Bill in 1991) meant reliance
  on an outdated regulatory system for a
  significant period of time (however, this is
  now changing).
Structure and Regulations of the
US Commercial Banking Industry
 There are around 2800 commercial banks in
  the USA, for more than in any other country
  in the world.
 In Canada or UK usually five or six major
  banks dominate the industry but in USA ten
  largest banks hold only 36% of the assets in
  their industry.
 Two-thirds of deposits are held by
  commercial banks, and the remaining by
  thrift institutions (discussed later).
 Restrictions and regulations on branches
  had resulted in more banks in competition.
 Structure and Regulations of the US
 Commercial Banking Industry
 In the past, it had been a case that an
  American bank could open a branch in
  foreign country more easily than in other
  states within the USA.
 The McFadden-Pepper Act (1927), had
  effectively prohibited larger banks from
  opening branches across different
 But, from late 1990s, situation is
 Regulation on branches particularly are
  being eased.
Commercial Bank Consolidation
 Bank failures in late 1980s and early 1990s
  had provided the base for consolidation.
 Bank consolidation was further stimulated
  by the passage of Riegle-Neal Interstate
  Banking and Branching Efficiency Act
 This legislation effectively overturned the
  McFadden Act which prohibited interstate
 This Act had almost ensured interstate
  banking roughly in all 50 states.
Commercial Bank Consolidation
 It is anticipated that after consolidation
  has run its course, there will be roughly
  4000 commercial banks rather than
  present 8500
 Another important feature had been the
  separation of commercial banking from
  investment banking such as securities,
  insurance and real state business.
 Glass-Steagall Act (1933) had prohibited
  them from underwriting corporate
  securities or from engaging in brokerage
Commercial Bank Consolidation

 In turn, this Act had also prohibited investment
  banks and insurance companies from engaging
  in commercial banking activities
 In 1997, however, the Federal Reserve allowed
  holding companied to underwrite securities and
 Initially it was a restriction that the revenue from
  these activities should be no more than 10% of
  total revenue (raised to 25% later on).
 Restrictions on commercial bank securities and
  insurance activities put American banks at a
  comparative disadvantage relative to foreign
Commercial Bank Consolidation

  In 1999, US Congress had passed a bill,
   which effectively abolished the Glass-
   Steagall Act.
  This legislation, which is called Gramm-
   Leach-Bliley Financial Services
   Modernisation Act, allowed securities
   firms and insurance companies to
   purchase banks and allowed banks to
   underwrite insurance and securities and
   engage in real estate activities.
 International Banking in USA
 In 1960s eight US banks operated branches in
  foreign countries and their total assets were less
  than $4 billion.
 Currently there are more than 100 American banks
  working abroad with assets totalling over $500
 The growth in foreign banks can be explained by:
    Expansion of international trade.
    Expansion of efficiently selling investment
       banking services abroad.
 US banks had most of their branched in Latin
  America, the Far East, the Caribbean and London.
International Banking in USA
 Due to trade expansion, foreign banks had been
  encouraged to do business in USA.
 These foreign banks had been very successful
 These foreign banks are lending roughly the
  same amount of money to corporations as the
  US banks.
 These foreign banks are operating by using the
  agency offices, subsidiary banks and branches.
 Before 1978, foreign banks were under fewer
  regulations with no reserve requirements.
 However, the 1978 International Banking Act put
  foreign and domestic banks on equal footing.
Structure and Regulations of the US
Commercial Banking Industry
The regulatory restrictions on branches
 had resulted in three developments:
  Bank holding companies
  „Nonbank‟ banks
  Automated Teller Machines (ATM)
Bank Holding Companies

 A holding company is a corporation that
  owns several different companies.
 The growth of holding companies over
  the time had been dramatic to avoid the
  branching restrictions, because the
  holding company can own a controlling
  interest in several banks even if
  branching is not permitted.
 These holding companies had been and
  can involve investment banking activities
  which were banned from commercial
  banking services.
 „Nonbank‟ Banks
 Another way banks used to avoid
  branching restrictions was due to
  loopholes in the Bank Holding Act of
  1956, which defined a bank as a financial
  institution that accepts deposits and
  makes loans.
 Once bank holding companies had
  recognized this loophole, they open
  branches with one function only (means
  offering loan facility or taking deposits
 However, the Competitive Act passed in
  1981 had effectively filled this loophole.
 The modern day facility of „ATM‟ was originally
  invented to avoid branching restrictions in USA.
 Banks recognised that even if they don‟t have ATM
  machines of their own, they could use rented
  machines to avoid branching restrictions.
 A number of these shared facilities such as Cirrus
  and NYCE have been established nationwide.
 States also had encouraged these ATM machines
  rather than “brick and mortar branches.”
 ATM machines gained in popularity with the advent
  of cheap computers.
Unique US Financial Institutions

We will discuss two unique Financial
  Savings and Loans
  Credit Unions
Savings and Loan Associations
 Not surprisingly, the regulations and
  structure of the thrift industry closely parallel
  the regulations and restrictions of the
  commercial banking industry.
 Just as there is dual banking for commercial
  banks, savings and loan association can be
  charted by the Federal government or by the
 The Savings Association Insurance Fund
  (SAIF), a subsidiary of FDIC, provides
  Federal Deposit Insurance (up to $100,000
  per account) for S &LS
 Savings and Loan Associations

 The branching regulations for S&Ls were
  more liberal than for commercial banks:
    From 1980s federally charted S&Ls were
     allowed to branch state-wide in all states
 These S&Ls usually provides loans for
  mortgages on soft terms (low interest
  rates and longer repayment period).
 In late 1980s, these S&Ls started
  becoming involved in commercial
  banking activities.
 Credit unions
 Credit unions are small cooperative
  lending institutions.
 They are the only financial institutions
  which are tax exempted and can be
  chartered either by the state or the federal
 The National Credit Union Share Insurance
  Fund (NCUSIF) provides insurance for
 These unions are permitted to do
  branching in all states w/o any problems.

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